What could be the impact of a Grexit?

Even if the Greek people did not vote against the Eurozone, they are clearly against additional austerity measures.

Following this unexpected result, the capacity for the Greek government and its creditors to reach a deal in the coming days appears limited. While the timing is short and dissensions between European leaders have increased, it is difficult to identify factors that would allow negotiations to move forward. Nevertheless, the liquidity stress will urge decisions.
We consider that the probability of no agreement being found is now the most likely and that it could lead to a Grexit.

No deal in the coming days and liquidity stress could lead to the issuance of IOUs(¹) . It would be the first step towards a new currency and in any case not be a sustainable solution.

We must differentiate the short- and medium- term consequences of a Grexit.

Over the short term
We think that the impact will be relatively limited due to the strong action of the ECB. While the European Central Bank continues its massive bond purchases in a period during which new issuances are limited, contagion to other peripheral countries will be limited.

Over the medium term
A Grexit could really challenge the economic confidence in the Eurozone. ECB and European political leaders’ actions will be key to limiting the increase of risk premia.
We will reassess our positive scenario on equities and the Eurozone if we see a material impact on our macroeconomic scenario (confidence shock) or if contagion is no longer contained (e.g. outflows of deposits from banks in peripheral countries).
Over the longer term, the construction and the stability of the monetary union would be challenged by a Grexit. This would have a more durable impact on the valuation of Eurozone assets. We would have to take into account the risk of redenomination of debts and other assets in another currency since the Euro would not be irreversible anymore.

Can an exit be avoided?
Another scenario could be that a deal will be reached in the following days, which is the actual wish of the Greek government and the European Union. We have had many times in the recent history of the Eurozone last-minute “surprise” yet creative deals that we had not anticipated before. This positive outcome could result, for example, in an agreement which combines the acceptation of austerity by Greece with the possibility of debt renegotiation on the creditors’ side.
In that case, the impact on markets would be more clearly positive.

In this context how are we positioned on Eurozone assets?
For several weeks we have been decreasing our equity exposure, mainly by implementing hedging strategies or reducing exposure to Eurozone equities. After a strong overweight during the first months of the year, we now are neutral on the region.
On the bond side, we remain neutral on peripheral countries for the time being.
We also reinforced our exposure to USD at the beginning of last week, which we still consider a good hedge against tail risk in the case of a Grexit.

(¹): IOU : An informal document that acknowledges a debt owed. IOU is an abbreviation, in phonetic terms, of “I owe you.” The debt owed does not necessarily involve a monetary value but can also involve other products. With IOUs being informal, those issuing the IOU are given free reign when writing and issuing an IOU. Things like time, date, interest, and payment type are not mandatory but may be implied (used for example by US state of California in 2009). Source: http://www.investopedia.com/terms/i/iou.asp#ixzz3f6XMNBab